Death to the 'Bubble Poppers'

This is one incredible financial and emotional roller-coaster, with good and
bad days, weeks, months and quarters. We are, however, afforded an extraordinary
opportunity to truly live financial history on a daily basis. The Dow enjoyed
its seventh consecutive gain, adding 3% this week. The S&P500 gained 2%,
with the Utilities and Morgan Stanley Cyclical indices up 3%. The Morgan Stanley
Consumer index added 1%, while the Transports declined 1%. The strong rally
in the broader market continued, with the small cap Russell 2000 gaining 4%
and the S&P400 Mid-Cap index adding 3%. The technology rally turned into
a buyers' panic, as the NASDAQ 100 jumped 5%, the Morgan Stanley High tech
index 7%, and the Semiconductors 13%. The Street.com Internet index and the
NASDAQ Telecommunications indices gained 7% and 4%. The tech sector is putting
together a rather respectable showing, with the NASDAQ100, Morgan Stanley High
Tech, Semiconductors, and The Street.com Internet indices sporting quarter-to-date
gains of 34%, 40%, 52%, and 46%. For the week, the Biotechs were up 7%, the
Securities Broker/Dealer 6%, and the Banks 4%. Although bullion ended the week
unchanged, the HUI Gold index dropped 5%.

The Treasury market was none to pleased by it all. For the week, two-year
Treasury yields jumped 19 basis points to 2.06%, and five-year yields jumped
22 basis points to 3.24%. The 10-year Treasury note saw its yields rise 15
basis points to 4.18%, while the long-bond yield added 11 basis points to 5.02%.
Benchmark mortgage-back yields increased 11 basis points, and the implied yield
on agency futures jumped 12 basis points. The spread on Fannie Mae 5 3/8% 2011
notes narrowed two to 48, while the benchmark 10-year dollar swap spread narrowed
one to 48. December three-month Eurodollar rates added 1.5 to 1.425%. With
stocks sprinting, the dollar jogged cautiously to a 1% gain for the week. Corporate
spreads generally narrowed significantly this week. Whether stocks (especially
companies with fundamental issues/short positions), corporate bonds, or Credit
default swaps, the timely news of a buyer for Household International has proved
a catalyst for a major reversal of "risk" bets and hedges. Or, stated
differently, it's been one heck of a squeeze for anyone short stocks, corporate
bonds or Credit protection. Markets will be markets, and we are today dealing
with truly extraordinary financial market dynamics.

Weekly bankruptcy filings declined to 30,181; although they remain 16% above
the year ago level. Housing starts dropped 11% to the lowest level in six months,
although new permits were strong. The Mortgage Bankers Association's Refi Application
index jumped 27.9% (up 23.5% y-o-y) to the fourth highest level on record.
The Purchase Application index rebounded 3.5% from the previous week's nearly
10% decline and remains almost 17% above the year ago level. The annualized
growth of Freddie Mac' total "book of business" slowed to 5.9% during
October (to $1.27 Trillion), with its retained mortgage portfolio expanding
at a 12.9% rate (to $536 billion).

Fiscal year 2003 is off to a discouraging start for federal government finances.
October's fiscal deficit of $54 billion - a record for the first month of a
fiscal year - compares to the year ago deficit of $7.6 billion. Government
spending was up 8.6% (defense spending up 15%), while revenues were down 20%.
The timing of corporate tax payments apparently explains part of the revenue
shortfall, but it is worth noting that individual tax receipts were down 13%
y-o-y.

This week from the Bond Market Association: "Domestic bond issuance
totaled $3.8 Trillion in the first three quarters of 2002, a 19.6% increase
over the $3.2 Trillion issued in the same period of 2001, itself a record
year.Gains were seen across all sectors, with the exception of the
corporate market, where issuance decreased 26% when compared to the first
nine months of 2001… Treasury gross coupon issuance totaled $424.6
billion in the first three quarters of 2002, up from the $238.6 billion issued
during the same period last year… Daily trading volume by primary dealers
averaged $361.4 billion during the first three quarters of 2002, up 26.4%...from
the same period of 2001… Long-term debt issuance by federal agencies
totaled $740.0 billion for the first three quarters…up 12% (from last
year's same period)…

"Continuing what will be a record year for municipal bond issuance,
state and local bond sales totaled $302.5 billion in the first three
quarters of 2002, topping the previous record of $264.3 billion set in the
same period of 1993. Municipal issuance increased 26.5% (from last
year's same period)… The surge in issuance resulted from the need to
meet ongoing infrastructure requirements and finance new projects. In addition,
state and local governments are using the proceeds to fill budget gaps resulting
from lowered tax receipts brought about by slow economic growth." Average
daily muni trading volume jumped 31% to $10.6 billion. Total corporate issuance
dropped 26% to $491.1 billion, with investment grade issuance down 20.6%
(to $430B) and junk issuance down 39.7% (to $43.4B). Corporate trading volume
was down 14.3%.

"Issuance in the asset-backed securities (ABS) market is on pace to
break the record set in 2001. New issue activity totaled $357.9 billion in
the first three quarters of the year, up 11.9% (from last year's same
period)… Among the major sectors, home equity loans experienced
the largest increase…with volume totaling $115.9 billion during the
first three quarters, up 32.5% (from last year's same period)… Total
issuance in the auto loan sector increased 20.2% to $71.6 billion… Issuance
in the credit card sector decreased 19% to $52.8 billion… Mortgage-related
securities issuance, which includes agency and private-label pass-throughs
and CMOs, is on pace to break the record of $1.67 Trillion set in 2001. Issuance
totaled $1.54 Trillion in the first three quarters of the year, up 39.4% from
the $1.1 Trillion issued (y-o-y)…On a quarterly basis, new issuance
volume totaled $532.1 billion in the third quarter… Daily trading
volume in agency mortgage-backed securities by primary dealers averaged $145.4
billion in the first three quarters of 2002, up 39.5%... The
average volume of total outstanding repurchase (repo) and reverse repo agreement
contracts totaled $3.64 Trillion for the first three quarters of 2002, an
increase of 20.6% over the average volume of $3.02 Trillion during the same
period of 2001. Outstanding repo agreements averaged $2.10 Trillion through
September of 2002, and increase of 21.0%..." Outstanding repurchase
agreements are up 81% since the end of 1997 and 46% since the end of 2000,
claiming title to the "epicenter" of the Great Credit Bubble.

From the Consumer Federation of America (CFA): 'Nearly one-third of adult
Americans are very concerned about making debt payments, and that percentage
is up significantly from last year,' said Stephen Brobeck, CFA executive director.
From last year to this one, consumer concern about 'meeting your monthly payments
on all types of debt other than your mortgage' rose from 39% to 46%. And those 'very
concerned' about making these debt payments rose even more sharply, from 19%
to 30%..." At the same time, "Nearly three-quarters (73%) of
those with incomes over $50,000 say they plan to use credit cards for holiday
purchases, and 37% say they intend to use plastic for most holiday purchases."

November 21 American Banker: "In markets where demand is outstripping
the supply of homes for sale, and where soaring land prices are pushing up
builders' costs, there's just no reason to worry about a so-called bubble." President
of the National Association of Home Builders (I guess that's one way to look
at it)

November 20 - PRNewswire: "'Overall, (California) luxury home values
remained stable throughout California in the third quarter, but there are signs
of softening,' said Katherine August-deWilde, Chief Operating Officer of First
Republic Bank. 'Inventory is rising, days on the market are lengthening, and
multiple offers are infrequent. Given the softness of the economy and uncertainty
about world events, we remain cautious about values as we look ahead.'"

November 18 - The Indianapolis Star (Shannon Tan): "Weeds snarl the yard
of the house at 814 E. 24th St., and yellowed newspapers lie abandoned on the
front porch. Inside, electrical wires poke through the torn blue carpet and
shattered fixtures crowd the bathroom. Purchased for $16,000 in April, the
home just north of downtown Indianapolis sold a month later, unimproved, for
$323,000. The mortgage brokers who created the fake appraisal for that sale
have been charged with fraud, while the two-story house sits empty - one of
500 properties 'sold' in Indianapolis for greatly inflated prices in recent
years... Bad as the problem is in Indiana, it is worse in other parts of the
country. Reports of appraisal fraud nationwide tripled in the past six years,
according to the Mortgage Asset Research Institute… The fraud most commonly
involves a team of professionals faking paperwork to cheat a lender… Such
fraud would seem difficult, since people - and banks - rely on expert professionals
to oversee the purchase of a home. But if all those pros are working together
to defraud a buyer or lender, it can be hard to tell."

November 18 - Bloomberg: Comments from David Coles, a managing director at
restructuring firm Alvarez & Marsal, appointed chief executive at National
Century Financial Enterprises Inc.: "It's all very unfortunate. We had,
inadvertently, become the sole source of financing for many of the providers.
We were supposed to be a receivables financing operation, but we were lending
against equipment, future receivables, pro forma receivables, and providing
advances that weren't secured. I imagine that some of the providers will have
difficulty obtaining collateral financing quickly enough to avoid bankruptcy
proceedings… The scale of the deficits are quite staggering, about $500
million to $700 million in NPF VI and $1.5 billion to $2 billion in NPF XII,
which has been a shock to many people… An average of about $30 million
a day was coming into NPF XII in mid October. That has dribbled to about a
million."

November 19 - Bloomberg: "ING Bank NV, which is part of the biggest Dutch
financial-services company, has helped fund $500 million of debt for National
Century Financial Inc., a health-care financing company… ING's commitment
is through an asset-backed commercial paper program that it administers, Dow
Jones said, citing Jay Eisbruck, a managing director at Moody's Investors service… Credit
Suisse First Boston funded a similar program for $225 million, Dow Jones said.
Under such programs, banks package a variety of debt products into an off-balance
sheet securitization which funds itself by selling commercial bonds…"

There is now no doubt that National Century Financial was an outright fraud
involved in misappropriating funds, self-dealing, and fraudulent accounting
on a massive scale. Asset-backed securities that were top-rated until recently
are destined to suffer heavy losses. Cash-flow into ABS "lockboxes" has
slowed to a trickle. One health care official was quoted by USAToday: "Millions
are missing. It's a health care Enron. Health care providers from sea to shining
sea are involved in this thing." But unlike Enron, there were no opaque
off-shore vehicles, arcane derivative trading, sophisticated financial engineering
or complex accounting. And that's what troubles us the most. Two JPMorgan Chase
bankers were on National Century's board (one ran the audit committee!) and
Morgan was trustee on one of the company's main funding vehicles. Bank One
was trustee on the other. CSFirstBoston was National Century's investment banker
and Moody's was there to confer its top-rating to NCFE's asset-backed securities.
Deloitte Touche had been certifying the company's accounting statements. Like
Enron and too many other situations, we are troubled that our major financial
institutions are all too comfortably partners in "business" with
crooks - rather conspicuous ones at that.

And somehow the Greenspan "Teflon" Fed's perpetual ultra-easy money
policies and Bubble accommodations are not held responsible for what will surely
be unending revelations of widespread financial shenanigans (just wait until
fraudulent activity surfaces in the mortgage area). Yet, history tells us in
no uncertain terms that an environment of rampant uncontrolled money and credit
growth (with consequent Bubbling asset markets) promotes fraud and mismanagement.
It is then no coincidence that the current era with the most lax and acquiescent
to Wall Street Federal Reserve since the Roaring Twenties is also the period
with the most pervasive financial corruption since the 1920s. Has the public
interest been served by the Federal Reserve ceding control over the nation's
financial system to the leading Wall Street firms and their coterie of accomplices?
Who is minding the bustling ABS and MBS store?

November 21 - Federal Reserve governor Ben S. Bernanke: "I think it is
extraordinarily dangerous for the Fed to make itself the arbiter of security
values. And I think, moreover, that if the Fed tries to, quote, "Pop Bubbles" it's
likely that it creates disasters. The example I gave in my speech (Asset-Price "Bubbles" and
Monetary Policy, October 15, 2002) was the 1929 (experience). The Fed during
that period was concerned about a bubble in the stock market. And it raised
interest rates so much that it not only killed the stock market, it also killed
the rest of the economy. I think in general that the right way to address an
asset price bubble is not with monetary policy but rather by structuring
your financial markets in a way to make them as safe and sound as possible.
For example, by having good regulations and provisions on your banks - making
sure they are not lending against dubious collateral; by increasing transparency
in accounting and other forms of revealing information about firms and about
shares. History shows, and theory I think supports the view, that attempting
to manipulate asset prices with monetary policy is really a loosing game."

Truly dangerous is what passes for sound monetary thinking these days. Dr.
Bernanke, a career academic economist, has given two major speeches since he
was appointed Federal Reserve governor in July. From what I have read thus
far, he approaches the closest yet to the incarnate of the accomplished monetary
theorist and great inflationist John Law. And as Law learned the hard way, "attempting
to manipulate asset prices with monetary policy is really a loosing game."

From his speech yesterday - "Deflation: Making Sure 'It' Doesn't Happen
Here:" "As I have already emphasized, deflation is generally the
result of low and falling aggregate demand. The basic prescription for preventing
deflation is therefore straightforward, at least in principle: Use monetary
and fiscal policy as needed to support aggregate spending, in a manner as nearly
consistent as possible with full utilization of economic resources and low
and stable inflation. In other words, the best way to get out of trouble is
not to get into it in the first place."

"As I have mentioned, some observers have concluded that when the central
bank's policy rate falls to zero - its practical minimum - monetary policy
loses its ability to further stimulate aggregate demand and the economy. At
a broad conceptual level, and in my view in practice as well, this conclusion
is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a
government (in practice, the central bank in cooperation with other agencies)
should always be able to generate increased nominal spending and inflation,
even when the short-term nominal interest rate is at zero…"

"The conclusion that deflation is always reversible under a fiat money
system follows from basic economic reasoning. A little parable may prove useful:
Today an ounce of gold sells for $300, more or less. Now suppose that a modern
alchemist solves his subject's oldest problem by finding a way to produce unlimited
amounts of new gold at essentially no cost. Moreover, his invention is widely
publicized and scientifically verified, and he announces his intention to begin
massive production of gold within days. What would happen to the price of gold?
Presumably, the potentially unlimited supply of cheap gold would cause the
market price of gold to plummet. Indeed, if the market for gold is to any degree
efficient, the price of gold would collapse immediately after the announcement
of the invention, before the alchemist had produced and marketed a single ounce
of yellow metal."

"What has this got to do with monetary policy? Like gold, U.S. dollars
have value only to the extent that they are strictly limited in supply. But
the U.S. government has a technology, called a printing press (or, today, its
electronic equivalent), that allows it to produce as many U.S. dollars as it
wishes at essentially no cost. By increasing the number of U.S. dollars in
circulation, or even by credibly threatening to do so, the U.S. government
can also reduce the value of a dollar in terms of goods and services, which
is equivalent to raising the prices in dollars of those goods and services. We
conclude that, under a paper-money system, a determined government can always
generate higher spending and hence positive inflation… If we do fall
into deflation…we can take comfort that the logic of the printing
press example must assert itself, and sufficient injections of money will ultimately
always reverse a deflation."

We appreciate that Dr. Bernanke speaks his mind, and he certainly leaves little
room for doubt as to where he stands. And I will salute him for diving headfirst
into the critical economic issues of our time. We live in a democracy and these
things need to be discussed and debated. But he is both a blatant historical
revisionist and wolf in sheep's clothing inflationist - what he professes is
generally both reasonable and seductive, therefore potentially quite harmful.
We won't let this get out, but I guess we should be rather thankful that such
an individual exists. He embodies, in a single contemporary economist, a rather
inclusive package of the flawed analyses we are most eager to argue against:
the antithesis to sound money and prudent central banking. Although, it is
one more disturbing sign of the times that he is one of our newest Federal
Reserve governors. From what I have seen thus far, Dr. Bernanke is well on
his way to creating a place for himself in economic history.

From his October speech: "New eras bring new challenges… As
you know, the Fed has two broad sets of responsibilities. First, the Fed has
a mandate from the Congress to promote a healthy economy - specifically, maximum
sustainable employment, stable prices, and moderate long-term interest rates.
Second, since its founding the Fed has been entrusted with the responsibility of
helping to ensure the stability of the financial system… Policy
tightening might therefore be called for - but to contain the incipient
inflation not to arrest the stock-market boom per se…

"Let me discuss the two parts of this recommendation in a bit more detail.
The first part of the prescription implies that the Fed should use monetary
policy to target the economy, not the asset markets. As I will argue today,
I think for the Fed to be an 'arbiter of security speculation or values'
is neither desirable nor feasible…"

"The second part of my prescription is for the Fed to use its regulatory,
supervisory, and lender-of-last-resort powers to protect and defend the financial
system. In particular, alone and in concert with other agencies, the Fed should
ensure that financial institutions and markets are well prepared for the contingency
of a large shock to asset prices. The Fed and other regulators should insist
that banks be well capitalized and well diversified and that they stress-test
their portfolios against a wide range of scenarios… If necessary, the
Fed should provide ample liquidity until the immediate crisis has passed.
The Fed's response to the 1987 stock market break is a good example of what
I have in mind."

"Taken together, (these two principles) provide a strategy for policy
that has a number of advantages: It keeps monetary policy focused on the appropriate
goal variables, economic activity and inflation. It is transparent and easy
to communicate to the public. It does not require that central bankers be systematically
better than the market at valuing financial assets nor substitute policymakers'
judgments of company prospects for those of investors. Finally, and crucially,
it is a robust strategy, in that - although it certainly does not eliminate
all economic and financial instability - it protects the economy against truly
disastrous outcomes, which history has shown are possible when monetary policy
goes severely off the track."

While most of what he asserts is reasonable, we take strong exception to the
most critical Dr. Bernanke's analysis: Categorically, his prescription for
contemporary central banking to ignore asset-prices Bubbles, while being quick
to both inject liquidity into faltering markets and stimulate a weakening economy,
is precisely the course where "monetary policy goes severely off the track" and
fosters "truly disastrous outcomes." A monetary regime of uncontrolled
fiat money and Credit requires strict central bank regulation of lending and
speculative excess. Nurture Credit market speculation and you have a problem;
resort to sheltering and, worse, inciting leveraged speculation for policy
purposes (stimulating the financial markets and economy) and you court disaster.
I would argue that the Fed's conduct of ignoring gross Credit excess, rampant
speculation, and Bubbles generally, while guaranteeing the aggressive financial
players liquidity support in the event of systemic stress - and artificially
stimulating spending to circumvent the business cycle - is PRECISELY the prescription
for eventual disastrous financial and economic collapse. The "How To" for
depression…

Dr. Bernanke acknowledges that "a number of critics have argued that
monetary policy should be more proactive in trying to correct incipient 'imbalances'
in asset markets." "This debate is clarified considerably, in my
view, by recognition that, in practice, the advocates of a more vigorous monetary
policy response to asset prices fall into two broad camps, differing primarily
in how aggressive they think the Fed ought to be in attacking putative bubbles.
The first group, who favor what I will call the lean-against-the-bubble strategy,
agree that the Fed should take account of and respond to the implications of
asset-price changes for its macro goal variables… the Fed should try
to gently steer asset prices away from the presumed bubble path… My sense
is that this more moderate camp comprises the great majority of serious researches
who have advocated a monetary-policy response to bubbles..."

Well, at this point we would have zero faith in the effectiveness of "leaning
against" the Bubble. There's simply no painless short-cut to sound finance. "The
second group of critics is those preferring a more activist approach, which
I will call here aggressive bubble popping. Aggressive bubble-poppers
would like to see the Fed raise interest rates vigorously and proactively to
eliminate potential bubbles in asset prices. To be frank, this recommendation
concerns me greatly, and I hope to persuade you that it is antithetical to
time-tested principles and sound practices of central banking."

Where did they find this guy - the consummate antithesis to sound money? I
hope to persuade you that Dr. Bernanke's views are "antithetical to time-tested
principles and sound practices of central banking."

Dr. Bernanke : "Aspiring bubble poppers cannot get around the fact that
their strategy requires identifying bubbles as they occur, preferably quite
early on. Identifying a bubble in progress is intrinsically difficult… If
we nevertheless persist in trying to measure bubbles, what indicators might
be useful? Several have been suggested, including the rate of appreciation
of asset prices, various ratios that attempt to measure the return on stocks,
and growth in bank credit. None of these provides a reliable indicator
of a developing bubble."

Well, it is always our belief that economists make this much more difficult
than it needs to be. Why can't we look at total Credit growth, both non-financial
and financial, to better appreciate the quantity of new purchasing power created?
The focus must be broadly on the creation of financial sector liabilities (money
and Credit creation), identifying the institutions, entities, securities, instruments,
mechanisms and sectors responsible for the new financial claims (Credit/purchasing
power). At the same time, analysis should attempt to identify the sector(s)
most-likely to be at risk from the associated inflationary distortions (such
as extraordinary GSE Credit creation and attendant inflationary manifestations
in rising home prices, over-consumption and trade deficits). Greenspan spoke
of incipient stock and bond market Bubbles behind closed Fed doors back in
1994, with the fledgling financial Bubble conspicuous with regard to the 1993
bond issuance boom and proliferation of leveraged speculation. The expansive
Credit Bubble has become only more obvious in the data by the year. Without
a doubt, the analytical focus must be on the Credit system and NOT stock prices.
Arguing appropriate P/E ratios is like debating religion, politics or abortion.

Interestingly, Dr. Bernanke meanders closely to the heart of the issue: "Another
possible indicator of bubbles cited by some authors is the rapid growth of
credit, particularly bank credit (Borio and Lowe, 2002). Some of the
observed correlation may reflect simply the tendency of both credit and asset
prices to rise during economic booms. However, to the extent that credit expansion
is indicative of bubbles, I think that empirical linkage points to a better
policy approach than attempts at bubble-popping by the central bank. During
recent decades, unsustainable increases in asset prices have been associated
on a number of occasions with botched financial liberalization, in both
emerging-market and industrialized countries. The typical pattern is that
lending institutions are given substantially expanded powers that are not matched
by a commensurate increase in regulatory supervision - think of the savings
and loans in the United States in the 1980s. A situation develops in which
institutions can directly or indirectly take speculative positions using funds
protected by the deposit insurance safety net--the classic 'heads I win, tails
you lose' situation.

"When this moral hazard is present, credit flows rapidly into
inelastically supplied assets, such as real estate. Rapid appreciation
is the result, until the inevitable albeit belated regulatory crackdown stops
the flow of credit and leads to an asset-price crash. Bubbles of this
type may be identifiable to some extent after they have begun, but the right
policy is to do the financial deregulation correctly - that is, in a way
that does not allow speculative misuse of the safety net - in the first place.
Or failing that, to intervene and fix the problem when it is recognized."

The real story of the Great Credit Bubble is the explosion of non-bank Credit
creation by quasi-governmental organizations. With "Big Three GSE" exposure
at an unimaginable $3.8 Trillion (Fannie and Freddie's "book of business" plus
FHLB assets), are we not seeing an S&L-type "moral hazard" play
out in historical proportions throughout mortgage finance? So where's the "regulatory
crackdown?" And now that this Bubble is completely out of control, how
will it be possible "to intervene and fix the problem?" Who is willing
to take responsibility? The answer is no one.

From Dr. Bernanke: "Although neither I nor anyone else knows for sure,
my suspicion is that bubbles can normally be arrested only by an increase in
interest rates sharp enough to materially slow the whole economy. In short, we
cannot practice 'safe popping,' at least not with the blunt tool of monetary
policy… A truly vigorous attempt by a central bank to rein in a supposed
speculative bubble may well succeed but only at the risk of throttling a legitimate
economic boom or, worse, throwing the whole economy into depression."

Again, this is dangerous analysis - it implies absolute disregard for asset
inflation and asset Bubbles; that is, until they eventually begin to collapse
on their own account (NASDAQ). The goal of sound monetary management must to
promote financial stability and nip incipient Credit, speculative, and Bubble
excess in the bud. A healthy economy and financial system can handily weather
small, correctable central bank errors. Errors on the side of caution are easily
reversed. Errors on the side of accommodating financial excess, as we have
witnessed, do not reverse but compound exponentially and seductively. Somehow
contemporary thinking at the Fed and in academia has the costs of potential
small central bank errors of caution as unacceptably high, and the costs of
stimulating and inflating non-existent. Apparently, with China now an endless
source of cheap goods, the absence of CPI risk affords the opportunity to inflate
money and credit "till the cows come home." This is very warped,
although certainly expedient, "analysis."

What we must to avoid at all cost - because it risks financial derangement,
severe economic maladjustment, systemic collapse and depression - is the major
mistake of not dealing forcefully with Credit and speculative excess to the
point of unleashing uncontrollable and precarious financial and economic Bubbles.
And it must also be recognized that the longer Credit excess compounds upon
Credit excess, the tinier the Fed's "little" balance sheet becomes
next to the soaring Mount Everest of financial claims. Last week's total Federal
Reserve Assets of $685 billion compares to total outstanding Credit market
debt surpassing $34 Trillion. When that fateful day arrives, the antiquated
and feeble helicopter will need replaced with a large fleet of super-jumbo
cargo airships. All the same, if I were a Fed governor I'd be more careful
throwing around the "always" word, as in the power of the Fed to "always
be able to generate increased nominal spending and inflation."

The more easy money encourages households to take on the debt necessary to
buy a new car (artificially distort demand) and upgrade to a larger home (or
acquire stocks or munis, for that matter), the less likely they will be cajoled
into a repeat performance any time soon (government electronic "printing
press" notwithstanding). And finally, it is today worth pondering an issue
that continues to stoke gale force economic headwinds throughout Japan. Post-Credit
and assets Bubbles, risk-averse households are nonetheless holding enormous
and growing quantities of government debt and other financial claims. With
all this perceived financial wealth, why would we not expect Japanese consumers
to play it safe - temper spending and focus on reducing borrowings? The only
way many are not ok is to take on risk. At times people just feel better about
grabbing the money dropping from the helicopters and stuffing it securely inside
the mattress for a rainy day.

After promulgating dubious prescriptions for contemporary monetary management,
Dr. Bernanke then commits a most atrocious act of historical revisionism by
blaming the Great Depression on the "Bubble Poppers." I kid you not.

From Dr. Bernanke: "The U.S. experience of the 1920s illustrates many
of the points I have been making. As you know, the 'Roaring Twenties' was a
prosperous decade, characterized by extensive innovation in technology and
in business practices, rapid growth, American economic dominance, and general
high spirits. Stock prices roseaccordingly. As early as the
mid-1920s, however, various policymakers and commentators expressed concern
about the rapidly rising stock market and sought so-called corrective action
by the Federal Reserve. The corrective action was not forthcoming, however.
According to some authors, this was in large part because of the influence
of Benjamin Strong, long-time Governor of the Federal Reserve Bank of New
York and America's pre-eminent central banker of that era. Strong resisted
attempts to aim monetary policy at the stock market, arguing that raising interest
rates sufficiently to slow the market would have highly adverse effects on
the rest of the economy. 'Some of our critics damn us vigorously and constantly
for not tackling stock speculations,' Strong wrote about the debate. 'I am
wondering what will be the consequences of such a policy if it is undertaken
and who will assume responsibility for it.' However, Strong died from tuberculosis
early in 1928, and the Fed passed into the control of a coterie of aggressive
bubble-poppers…"

"The correct interpretation of the 1920s, then, is not the popular
one - that the stock market got overvalued, crashed, and caused a Great Depression. The
true story is that monetary policy tried overzealously to stop the rise in
stock prices. But the main effect of the tight monetary policy, as Benjamin
Strong had predicted, was to slow the economy -both domestically and, through
the workings of the gold standard, abroad… This interpretation of
the events of the late 1920s is shared by the most knowledgeable students of
the period, including Keynes, Friedman and Schwartz, and other leading
scholars of both the Depression era and today… monetary policy had
already turned exceptionally tight by late 1927… A small compensation
for the enormous tragedy of the Great Depression is that we learned some valuable
lessons about central banking. It would be a shame if those lessons
were to be forgotten."

This is stunning, misguided commentary. The harsh reality is that we learned
absolutely the wrong lessons from the Great Depression, and I would suggest
Dr. Bernanke and others go to the Mises.org website and order the recent compilation
of Murray Rothbard's writings, The History of Money and Banking in the
US. It is wonderfully written, brilliant and exceedingly pertinent history
(although the long introduction misses this critical point!). Diligent true
students of this critical period (and money and Credit generally) will have
a very difficult time refuting Rothbard's cogent and comprehensive analysis
that the Depression was the consequence of years of inflationary policies,
monetary mismanagement, and the Fed's accommodation of rampant financial excess
on Wall Street. It was a long road to unsound money, a dysfunctional Credit
system and perilous financial and economic Bubbles. "Exceptionally Tight" money
no more caused the crash in 1929 than it did the bursting of the NASDAQ Bubble
in 2000. Instead, there was a dilemma distressingly similar to today's, with
Bubbles only sustained by looser money and greater Credit and speculative excess.
It is only a matter of when, at what cost, and under what circumstance Bubbles
meet their inevitable fate. The "printing press," Dr. Bernanke, is
the problem and not the solution.

Again using Dr. Bernanke's own words (but from our antithetical analytical
framework): "In other words, the best way to get out of trouble is
not to get into it in the first place." Precisely! And that is what
Dr. Richebacher has been preaching for years. Paraphrasing the good doctor, "There
is no cure for a Bubble other than not letting it begin in the first place." If
the Wall Street darling Benjamin Strong would have acted responsibly to safeguard
sound money and financial stability - thus thwarting financial and economic
excess in the mid-twenties as things began running completely out of control
- it is likely that financial collapse and depression could have been avoided.
And applying Dr. Henry Kaufman's quote regarding the Greenspan era: "The
Fed missed its timing." Well, Benjamin Strong bet the farm and lost. Greenspan
has lost the ranch, although the "house" apprehensively consents
to his gambling on his neighbors' homesteads. Blaming the Great Depression
on those that were rightly fearful of escalating dangerous financial and economic
imbalances - those dreadful "Bubble Poppers" - is such a gross distortion
of the facts and an injustice to sound economic analysis. Long live the Bubble
Poppers!